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Prudential documents released

Documents made public in December show Florida officials were prepared to file civil racketeering charges against Prudential Insurance Co. of America before the two sides reached a settlement.

Prudential, one of the nation's largest life insurance companies, agreed in April 1997 to pay Florida a $15 million fine for using deceptive sales practices. Florida was one of several states that held out for tougher penalties than spelled out by a class-action settlement approved by a federal judge in March 1997. In all, the company agreed to pay $35 million to 45 states and the District of Columbia, and another $35 to California, Florida, Massachusetts, Texas and Virginia.

The class-action settlement will cost Prudential at least $410 million. Some have said that figure could run as high as $2 billion, depending on the findings of arbitrators reviewing policyholders' claims. So far, more than 600,000 claims have been filed.

An appeal of the class-action settlement is scheduled for a hearing Jan. 26.

Florida officials had planned to make the damaging documents -- given anonymously to the Department of Insurance in December 1996 -- public after reaching the settlement with Prudential. The company, however, obtained a court injunction to keep the documents private. That injunction was reversed and the state attorney general's office released the documents in mid-December. Prudential is still trying to get the state supreme court to take up the matter.

A group of policyholders who had opted out of the class-action settlement had fought to gain access to the documents, saying they proved that Prudential knew more than it let on about its deceptive sales practices, which included "churning," the practice of using the built-up cash value of existing policies to finance new, often unneeded, policies.

After investigating the insurance giant's sales practices for two years, state officials concluded that the company had planned to cheat its customers for more than 10 years.

"Prudential trained its agents to mislead, misrepresent and defraud policyholders," according to an internal report on the investigation. "The company is the core of this fraud."

Included in the documents is a 1994 "assessment of internal controls" performed for Prudential by Coopers & Lybrand.

The 120-page document, which contains a stamp reading "Confidential -- Attorney-Client Communication" on each page, is critical of Prudential and its supervision of employees.

"Our findings indicate that the [Prudential Insurance and Financial Services] culture must change to support effective control, including compliance," the introduction to the document says.

The report goes on to say that the "concept of risk assessment has not been applied to sales practices" by all the company's departments which have oversight responsibility.

"As individual sales representatives, groups of representatives, district offices or groups of offices emerge as outstanding producers, no one is effectively questioning how this happened. ... Authority rests with the [vice presidents of regional marketing]. The timing and nature of VPs,RM's response to issues raised by the oversight groups often communicates a view that 'controls inhibit production.'"

Other documents include internal audits and memos, and testimony by former Prudential employees, some of whom are listed as confidential witnesses.

According to testimony by a "confidential witness" taken Oct. 18, 1996, Prudential knew some of its agents were improperly financing insurance with the proceeds from older policies in the early 1980s, and possibly even earlier.

"Evidently, the company knew about this as early as the early '80s," the witness says. "I think you'll see from this [an audit report] that they knew about it before the early '80s."

"Referring to financed insurance?" asks Douglas Shropshire, an attorney with the state's division of legal services.

"Wrongful sales practices including financed insurance," the witness says.

"I guess an easy way to do this," says Keith Vanden Dooren, the state's senior assistant attorney general in charge of the racketeering section, "assuming you are talking about the APP, the financing and the pension plan stuff, unless you tell us ..."

"And insurance sold as an investment," the witness says. "The kind of problems in the 1982 audit report they noted that ... financing of new business using insurance surrenders, without the full knowledge of the policyholder in one district office. They also indicated that they [the auditors] were intensifying audit activity of the district office referring to Cedar Rapids, Iowa."

Later, the witness says the irregularities were mentioned in several "normal" audits of agencies around the country. The audits, the witness says, would have been presented to the auditing committee of Prudential's board of directors.

Several audits in the mid-'80s reported no major problems. "In 1987, they reported that management controls have been administered in a satisfactory manner," the witness says, noting that 34 percent of district agency offices and 31 percent of the "ordinary" agencies were audited that year. That "should have been a significant enough sample to discover problems," the witness says.

"Do we know why it didn't uncover anything?" asks Eric Camil, an investigator for the state attorney general's office.

"No," the witness says. "I can't figure it out because it [financed insurance sales] was common knowledge. In the 1988 audit, the report states management controls were generally satisfactory. Support functions were performed in accord with company guidelines, but they also indicate that another area of concern is the need to strengthen field management's supervision of agents' activity. '88 is where they begin to talk about supervision of agent activity in a significant fashion."

Dan McLaughlin, a spokesman for the state department of insurance, said the department and the attorney general's office had reviewed all the documents before the settlement was made in April 1997.

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